Question

*The USD/euro exchange rate is 1.3000. The exchange rate
volatility is 15%. A US company will**have to pay 1 million
euros in three months. The euro and USD risk-free rates are 5% and
4%,**respectively. The company decides to use a range
forward contract with the lower strike equal
to**1.2500.**(a)*

*What should the higher strike be to create a zero-cost
contract?**(b)*

*What position in calls and puts should the company
take?**(c)*

*Show that your answer to (a) does not depend on interest
rates providing the interest rate**differential between the
two currencies, r* *–* *r* *f* *,
remains the same.*

Answer #1

(a) A put with a strike price of 1.25 is worth $0.019. By trial and error DerivaGem can be used to show that the strike price of a call that leads to a call having a price of $0.019 is 1.3477. This is the higher strike price to create a zero cost contract.

(b) The company should sell a put with strike price 1.25 and buy a call with strike price 1.3477. This ensures that the exchange rate it pays for the euros is between 1.2500 and 1.3477.

(c) If the interest rates change so that the spread between the
dollar and euro interest rates remains the same, forward prices
remain the same. From equations (15.10) and (15.11). changes to
*r* have the same proportional effect on both *c* and
*p*. If the relationship c = p holds for one value of
*r*, it holds for all values of *r* . as a result the
answer to (a) is unchanged when the spread between the two rates is
held the same.

Suppose Company A bought a call option for $0.03 per euro, with
a spot rate of 1euro to $1.0872, the strike price 30-days forward
is 1 euro to the US$ is1.0915. If the spot rate 30 days from now is
$1.0920, determine the profit/loss on the call option for $1.0910,
$1.0915, $1.0918 and $1.0920. Contract size is 62,500 euros. (10
points) (Ch 8)
Please provide step by step solution when providing the
explanation

Currency
Spot quote
Euro (EUR/USD)
1.1278 - 1.1281
British pound (GBP/USD)
1.2845 - 1.2848
Swiss franc (USD/CHF)
1.0020 – 1.0022
Japanese yen (USD/JPY)
110.41 – 110.44
Dominican peso (USD/DOP)
50.540 – 50.600
Part 2. Forward exchange rates
1. If the 3-month forward bid and ask quotes for the British
pound are 15 21, what are the 3-month forward bid and ask exchange
rates?
2. How many US dollars will a customer that enters a 3-month
forward contract to buy £1...

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Consider the Euro-dollar exchange rate (nominal exchange rate =
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for the foreign exchange market to show the impact on the exchange
rate. In each case, does the exchange rate appreciate or
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a. A debt crisis in Europe causes investors holding Euro
denominated securities to move to dollar denominated
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b. The European Central Banks raises interest rates, attracting
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Assume that the spot exchange rate is 1.38 USD/GBP, while
interest rates are 3.2% in the US and 2.5% in the UK.
a. According to international parity conditions, what is the
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b. You believe that political conditions are such that the GBP
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c. If you take the position chosen in part B and the spot rate
in six...

3) Suppose that the spot exchange rate S(¥/€) between the yen
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Which of the following statements is MOST likely to be true?
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when priced in the low
interest rate currency to prevent covered interest arbitrage
Page 3 of 13
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The current spot price is S0= $1.12/€, the volatility of the
exchange rate is ? = 9.682%. For a 125 days call option with Strike
price = $1.15/€, what is the fair option premium by using binomial
option-pricing model? Assume prevailing forward rate F125?day =
$1.1245/€, USD interest rate for 125 days is r$ = 2%. Euler’s e =
2.71.
A. $0.2183/€
B. $0.1359/€
C. $0.0768/€
D. $0.0179/€
(Think what if it’s a put option?)
How do you get the...

Suppose that the euro exchange rate is $1.15/euro. The
continuously compounded dollar interest rate is at 3% and the
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you borrow euros and lend dollars for 1 year, without using futures
for hedging, and your initial cash flow is zero.
(a) At what exchange rate in 1 year will you break even on this
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(b) If the exchange rate in 1 year is $1.20, what is your profit
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a)Price of a $50 U.S. sweater in Paris (in euros)
b)Price of a € 100 French shirt in New York (in dollars)
c) Provide an example exchange rate that would be a US dollar
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d)Suppose more Americans suddenly want to visit France. Would
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Suppose we have the following exchange rate quotes:
in US$
per US$
Euro area (€)
1.3570
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Mexico (Ps)
.0781
12.8057
a. If you have $250, you can get euros.
(Do not round intermediate calculations and round your
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b. One euro is worth $ . (Do
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